SEC chief’s to-do list starts with market fix

Commentary: Five things Elisse Walter needs to do

After four less-than-revolutionary years under Chairman Mary Schapiro, the Securities and Exchange Commission is getting new leadership. The White House will nominate Elisse Walter as the next chairman.

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Elisse Walter could make a big difference with a few fixes.

By most accounts, Walter is unlikely to be the transformative figure many SEC critics have been pining for since the 2008 financial crisis. Like Schapiro, Walter has spent most of her career as a regulator. She worked at NASD and the Commodities Futures Trading Commission and for Schapiro at the Financial Industry Regulatory Authority.

There are so many problems facing the SEC, it’s hard to just name a few. Walter can get started with these top-of-the-agenda items.

1. Plug In. As underscored by the “flash crash” in May 2010 and the subsequent mini flash crashes since, the SEC is dangerously out of touch with how financial markets work today. Its solution to the problem — more circuit breakers — show how far out of the game the SEC is. Walter would do well to use her authority to hire the best and brightest technicians and algorithmic traders in the marketplace, and infiltrate the biggest automated traders on the Street. As Patrick Healy of the Issuer Advisory Group recently told me, high-frequency trading is a poker game that has nothing to do with the underlying companies, and CEOs “are tired of supplying the chips.”

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Outgoing SEC chief Mary Schapiro

2. Link up. Elisse Walter, meet Gary Gensler. You may have seen him on Capitol Hill. Gensler runs the CFTC, where you used work. Things have changed since your days at the commission in the mid-1990s. Gensler’s CFTC is now the most important Wall Street regulator in Washington, overseeing between $3 trillion and $5 trillion in derivatives. The derivative markets, which used to be built on underlying securities such as stocks, bonds and commodities prices, have become so big they are now the tail wagging the dog for investors. Having separate regulators for 20th century Wall Street (the SEC) and 21st century Wall Street (CFTC) doesn’t make any sense. The agencies should be combined. If not, please work with Gensler in a more meaningful way. Your predecessor needed to do more.

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3. Don’t fix what’s not broken. One of the few bright spots of the Schapiro era at the SEC was Robert Khuzami’s enforcement team that wrestled a $550 million settlement from Goldman Sachs Group Inc.
GS, -1.03%
and won more than 50 convictions connected to insider trading. Walter should give more support to Khuzami and press him to go after bigger fish.

4. Get tough. One of the criticisms of Schapiro’s SEC was that it was too passive when it came to rule making. Since Dodd-Frank was passed in 2010, the industry has slowed the process. Only 38.1% of the law’s 237 deadlines have been met as of Oct. 1, including 42 missed deadlines out of 95 at the SEC, according to the law firm Davis Polk & Wardwell. Why not turn the tables and start pushing back against Wall Street? Many of these deadlines are rules tied to systemic risk and asset-backed securities. They need to be addressed.

5. Close the door. The biggest problem with the SEC and Wall Street regulation is the ample opportunity staffers get to double, triple or quadruple their salaries by switching sides and working for securities firms regulated by the SEC. Between 2006 and 2010, 219 former SEC employees filed 789 post-employment statements indicating their intent to represent an outside client before the commission, according to the Project on Government Oversight. POGO also found “131 entities providing legal, accounting, consulting, and other services that were identified as new employers in the statements.” Some entities recruited numerous SEC employees during the five-year period. Schapiro made some strides in keeping personnel, Walter should make it even harder to leave the SEC by following POGO’s recommendations: making ‘revolving door’ moves public, simplifying rules and impose penalties. See report on SEC’s ‘revolving door.’

Ultimately, Walter needs to rethink her predecessor’s approach. A good model would be Sheila Bair, who led the Federal Deposit Insurance Corp. until last year. She was combative, independent and outspoken. She didn’t always win, but banks didn’t like to tangle with her.

Fora Washington bureaucrat, Bair did something unusual with the opportunity she was presented with: she seized it. Walter should take note.

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